Gaps

Beginner Questions
1

First, sorry about the weird bullet format, but I think I get an A for effort.

It seems that the Sunday PM EST GAPs are a common subject for discussion around the Retail Spot Currency traders watercooler, so I though I might take a moment to elucidate on this subject.

The first thing to remember about Spot is there is no central exchange, and as such, there is no central quote source. The quotes that Retail traders see are generated from a homogenized composite that, depending on the “Broker”, consists of the following.

  1. Local feed
    ___A. Client accounts
    _____1. Individual, Block, Poa
    ___B. Internal Prop
    _____1. Alternative Investments run by the “Broker”
    ___C. Internal Inventory
    _____1. Inventory of Units kept on hand
    _______a. These are units of pairs kept on hand to “fill in” SOE
    _________1. Just in case there are no takers at a certain size and price, this “inventory” fills in
    ______(you guys really didn’t think that your 1 Mini lot was executed by RBS did you?)

  2. Prime broker feed
    __A. This feed consists of at least one PB. 2 important things to remember about PBs
    ____1. PBs do not, “in general”, interact with retail traders below 40k units
    ____2. The PBs take liquidity in the case of longs and provide liquidity in the case of shorts
    ______a. In other words the PBs do not actually “trade” per se on the Broker/Dealers Hub, all they are doing is being a counter party to specifically sized trades

  3. Data Provider feeds
    __A. This would include Bloomberg, Reuters, Et AL.
    ____1. Since these feeds are “composites” of composites, they exist and provide quotes from outside the Broker/Dealer Hub.
    ______a. These quote services run 24/7.
    ______b. These quote services also may have execution platforms built in for 24/7 trading

So how does all this fit together, and how does it effect these “GAPS”.

Well think of this, you might have MB Trading as your broker, now my understanding is that they shut off the servers at 5:00 PM EST Fri. and restart Sun at 6:00 PM est. Now, MBT may have shut down their servers, but the PBs and quote services are still running, so when MBT fires up the servers on Sunday the first data that shows may not be the last quote from Friday, it could be most current quote for the weekend. This makes it very clear as to why OANDA does not show “GAPS”, their servers run 24/7 so if there are trades made, the price moves just like it does during the week. (Capiche Talon D?) :57:

So to recap, if your “HUB” shuts down for the weekend, you will see gaps from time to time at the “open”, however if your “HUB” does not shut down for the weekend you will see the regular movement that you see during the week.

Now some will ask "what the heck were these people doing on the weekend and why were they doing it? Well there are reasons that have very little to do with what we consider “trading”, here are some examples.

A Broker may need inventory for the coming week of retail trading

Two parties who execute size may have made an agreement to Buy/Sell at a specific price, and they want to execute this without any possible interference from others who may be on their Hub.

A broker may be getting rid of excess inventory, or possibly odd lots.

Now finally we come to the trading part, there may be some who would like to position themselves before Monday, maybe late Friday or Saturday afternoon.

Now here is the interesting part, some Guru somewhere will see these Gaps and claim that there is a deep meaning to them and you can tell where the “Smart” money is by what the gap looks like and what happens afterward, some even say that Fridays close would somehow be indicated by Sundays gap.

In my case, before I would believe this and start risking one cent, I would want to see statistics backed up by a live trading blotter. Gurus are very good at taking random events and wrapping them in mysticism and a Guru vocabulary, something like this.

“On this gap open we see a bull trap set by bears trying to eat raccoons in the upward secondary tick pattern that is divergent to our Proprietary order flow indicator. You can see the x rated exhaustion level by which all of the sheep will be pulled in and sheared by the smart money”. Huh, what, Dude. Chris from XYZ broker was just clearing out some odd lots.

Anyway Nuff Said on this.

The Ever Saying Nuff Said VIPER

2

I knew that, that’s what I said in the chat. Oanda doesn’t have a gap. I can tell you at 5:59 what your metatrader broker’s opening price will be at 6:00 because I already see it on Oanda.

“On this gap open we see a bull trap set by bears trying to eat raccoons in the upward secondary tick pattern that is divergent to our Proprietary order flow indicator. You can see the x rated exhaustion level by which all of the sheep will be pulled in and sheared by the smart money”. Huh, what, Dude. Chris from XYZ broker was just clearing out some odd lots.

Anyway Nuff Said on this.

The Ever Saying Nuff Said VIPER

LOL
You should post that in the technical templates thread, it would make perfect sense there.

3

[QUOTE=TalonD;273135]I knew that, that’s what I said in the chat. Oanda doesn’t have a gap. I can tell you at 5:59 what your metatrader broker’s opening price will be at 6:00 because I already see it on Oanda.

Talon, I knew you knew what I knew, its a shame no one else knew. :smiley: Or rather it is a shame no one else would acknowledge the fact. I like to listen to others talk about trading and this system or that system, even if I disagree about systems, Trading is in its self very subjective, so its enjoyable to kick around some ideas. However, when incorrect info, like the Great Gap issue gets a lot of press, I take exception and have to set the record straight.

The Ever Setting It Straight VIPER

4

Yes…this is true, spot forex does not actually gap on sunday. However, forex FUTURES often do (as do all futures markets i’d assume…)

In fact, one of my favorite trades is to fade the gap fill, depending on market trend, direction of gap, and distance of gap.

Now… because the futures market and the forex spot market are extremely highly correlated, it is possible to look for the gap in futures, and take the trade in the spot… which i do sometimes myself.

Viper… all raccoons aside and proprietary stuff aside, I trade gaps in forex futures, and sometimes use those gaps to take complimentary trades in forex spot.

I agree tho, some people really overcomplicate stuff. I DO really appreciate the theory behind price change in the capital markets… but it’s really simple. It all boils down to supply and demand.

More sell orders at a price point than buy orders? price drops.

More buy orders at a price point than sell orders? price rises.

Lots of names for figuring that stuff out…but it’s all the same. supply, and demand.

Jay

P.S. Raccoons… X Rated indicators… awesome :slight_smile:

5

seems like a simple thing being made complicated

6

great line viper! my new sig LOL well not here but on forums that have sigs

On this gap open we see a bull trap set by bears trying to eat raccoons in the upward secondary tick pattern that is divergent to our Proprietary order flow indicator. You can see the x rated exhaustion level by which all of the sheep will be pulled in and sheared by the smart money

7

Hello Jay, and there is the Rub. In Spot Currency we have all sorts of different liquidity flying around, and while most is supply/demand speculation, there are the exceptions that I mentioned above, and at risk of repeating, most of the “non spec” happens on weekends on Hubs that most do not interact on.

If a trader would like to get an interesting education, open an OANDA demo account and follow it on the weekends for a while, interesting stuff, also if you could look at a Bloomie or Reuters terminal that is hooked to a couple of institutional hubs on an active weekend it is even more interesting.

So I guess the message is “know what we trade, and trade what we know”, education on how the Spot System works can help the trader to profitability.

The Always Trying To Pass It On VIPER

8

Futures don’t really have gaps either.

They gap because the futures pricing is tied to the spot prices.

I’ve watched weekends religiously for quite some time. There will be 75, and 100 pip or more moves that are usually negated by the time opening happens on Monday.

A true gap only happens with a market in full swing.
Those are the only ones that matter, and they are in fact, quite rare.

I totally agree with you Viper. Seems to me that most people forget this market isn’t driven solely by speculation. Huge market buys or sells are often not broker, or trade related. They are one way tickets, because the currency is actually needed. And that is especially true on the weekend.

Always helpful to keep that in mind when a sudden large move makes no sense.

9

That right there is just plain funny!

10

Tang… astute observation. I actually didn’t want to go into this, because I believed it would be outside the point viper is making, but since you brought it up, i thought a different working definition of “gap” may be helpful.

I know this is NOT a true gap definition (where you have a several pip price range where there is simply no bids or no offers, but the other side is aggressively buying or selling via market orders), but it is, I believe, a very useful paradigm from which to understand price action, liquidity, and gaps :slight_smile:

A “Gap” is the ultimate example of a lack of liquidity in the market. Not a single soul wants to buy or sell over a particular range of prices…therefore, causing those that want in (or…more likely…out) of their position to use a market order, and accept the slippage.

So, rather than stick to a strict definition of what a gap is, I think of gaps as just a far outlier on the bell curve of liquidity.

Simply: a gap represents a TOTAL lack of liquidity in the market. However, what if there was a period,say…the early sunday forex open…pre futures :wink:

where RELATIVELY FEW buyers and sellers pushed price quite out of line from where the mass of selling and buying was near the close on friday.

Although this wouldn’t be a strict “gap”. It would be… relatively speaking, closer to a gap (in terms of liquidity) than the average liquidity available during the last few hours of the forex market on friday.

Thus…when liquidity starts to return (usually during the beginning of the asian session), it will often push price back to “true value” fairly quickly… true value being defined as the price area where the most transations took place, most recently.

The reason the market is ABLE to push price back to “true value” is because…with relatively few orders pushing it up, say, 75 pips… there will be relatively few committed entities over that range of prices, therefore, relatively few entities who need to cover or change there positions. So when (comparatively speaking) large liquidity returns when the asian session begins, the sheer mass of orders “cuts through” this low liquidity “gap” :wink:

Sorry viper if this commentary is outside the scope of gap discussion. I think we can all agree the forex market doesn’t truly gap, since it is a 24/7 market. I think it is more useful to look at a gap as the most extreme example of a lack of market liquidity… and therefore, ANY area of price action that has a lack of liquidity is an area that can be faded… the lack of liquidity makes it fadable. A true “gap” is just the most extreme version of this.

Not disagreeing with you Tang…just trying to explain how I personally view “gaps”. I don’t care one bit that the forex market does or does not actually gap. What I care about is a zone where liquidity is lacking. That’s tradable… what one wants to name this zone… well… a rose by any other name, right? :wink:

Hope this isn’t seen as B.S. I’m trying to explain a rather abstract concept as clearly as possible… but I just don’t know if it’s possible in a thread on a forum post… again, maybe outside the scope of this thread.

Jay

11

One Sunday sitting in my lair
I saw a gap that was not there
It was not there again today
Oh hell I’ll trade it anyway!

I know someone who trades the fill of the gap, I’ll do it occasionally…

12

Every time I leave the computer for a while, and I come back, there is a gap.

A gap between where price was when I left, and where price is when I got back.

Price didn’t stop moving, it was in constant motion.

I just wasn’t there to see it :smiley:

14

Cool! more gaps to fade !

15

ere, no problem here, discuss away. I have seen these “gaps” ever since I have been involved in spot. As far as trading them, sometimes you can fade and sometimes you must trade directionally with the “GAP”. How to tell is just something traders have to figure it out for themselves. I think the whole point of my post was to give some behind the curtain info on how Spot works, and to demystify these “Gaps” a bit. One thing I can agree with you on is the push to normality as far as prices. The “Gap”, or rise in prices could be caused by inventory filling, if this is the case, when volume comes in it will push the price back to “normal”, and fade o licious, but if the rise in prices represents actual accumulation, then directional is the way to go.

By the way, I am not a fanatic when it comes to my threads, in fact if someone would like to post details of how to use these to a traders advantage, hey, the thread does say Gaps. I have one disadvantage here that most don’t and that is I cannot delve deeply into specific trading systems that I now use, NDA’s and all that, but if you or someone else would like to, go right ahead, I think it would be interesting!

The Ever Loving To Talk Trading VIPER :smiley: